Ready for the Crackdown on IRS Tip Reporting?

There was a time when both employees and employers of hospitality businesses such as restaurants could get away with being somewhat lax in IRS tip reporting. But those days are gone. With billions of dollars in tips going unreported every year, the IRS has clearly signaled that hospitality establishments and their tipped employees will be required to keep an accurate account of all earned wages.

Reasonable Estimates

The IRS can use what it refers to as a “reasonable estimate” to calculate how much payroll tax, which is required under the Federal Insurance Contributions Act (FICA), is due for both the business and its employees. This regulation came about following a court case in which the IRS placed a $23,000 lien against a restaurant in San Francisco for underreporting tips that were paid in cash to employees. It’s estimated that inaccurate IRS tip reporting results in more than a billion dollars lost in tax revenue each year. With employers expected to pay 7.65 percent, the IRS will be pursuing a huge amount of tax money this year.

Businesses and Their FICA Liability


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